FSI Brief Examines Regulatory Responses to COVID-19 Pandemic
FSI published a brief on regulatory responses, within the global financial system, to the COVID-19 pandemic. The brief takes stock of the types of financial measures that have been implemented and the rationale for implementation of these measures, along with their pros and cons. It addresses these aspects of policy response based on a simple framework and a set of principles that can guide the assessment. The brief explains that regulatory policy responses should seek to support economic activity while preserving soundness of the financial system while ensuring transparency.
Since the start of the COVID-19 crisis, prudential and related authorities have implemented a number of measures to support the supply of credit to the economy. The authors highlight that the objectives of financial policies should influence the type and extent of the adjustments. A solid and sound financial system is a prerequisite for sustainable growth. Asymmetric policies that simply ease standards in bad times but do not tighten them in good times could generate excessive risk-taking in the long run. This suggests three principles that could guide the assessment of the adjustments:
- The adjustments should be effective in supporting economic activity. This should apply at least to the crisis period, and preferably even beyond, when establishing the basis for a solid recovery.
- The adjustments should preserve the health of the banking (financial) system. Banks should remain sufficiently well-capitalized, liquid, and profitable to underpin sustainable growth.
- The adjustments should not undermine the long-run credibility of financial policies. Credibility is hard to gain and easy to lose. Compromising the policies excessively in the short run can create serious long-term damage. From this perspective, adjustments should be temporary. Transparency is key in meeting this principle.
The authors have highlighted that the recommendation for banks to make full use of capital and liquidity buffers should go hand in hand with restrictions on dividends and bonuses and clarity concerning the process for rebuilding them. Flexibility in loan classification criteria for prudential and accounting purposes should be complemented with sufficient disclosure on the criteria banks use to assess creditworthiness. The publication of detailed guidance on the application of expected loss provisioning rules, combined with sensible transitional arrangements, may constitute a balanced approach to mitigating the unintended effects of the new accounting standards.
Related Links
Keywords: International, Banking, Accounting, COVID-19, Liquidity Buffer, Transparency, Disclosures, Basel III, Regulatory Capital, Expected Credit Loss, IFRS 9, FSI, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.
